Since the 1990s, many countries have reformed their systems of transfers to low income families with an eye toward improving work incentives. This column shows, using Canadian data, that well-designed income transfers can not only help families make their way back to employment, but also improve the educational, mental health, and behavioural outcomes of the next generation.

Since the 1990s, many countries have reformed their systems of transfers to low-income families with an eye toward improving work incentives—helping people make a transition from welfare to work. Empirical evidence on transfer programs such as the Earned Income Tax Credit in the US or the Working Tax Credit in the UK, appears to be surprisingly robust. Well-designed transfer systems can have a strong influence on parents’ choice to work or not. This focus on welfare-to-work, however, seems to have diminished the attention paid to another important goal of well-designed transfer systems—improving the wellbeing of recipient families.

How does extra income affect family wellbeing?

Researchers and policy-makers have long been interested in figuring out the effect of income—or the lack of income—on families and children. The eternal problem for this research, however, was trying to establish causal relationships. Some of the same factors that might lead people to have lower income (impaired mental or physical health; a troubled childhood; lesser mental or physical capacity; less ambition or drive) might also lead their families to experience more problems. For this reason it has been difficult to attribute causally the family problems to the income shortfalls.

Of late, several researchers have found ways to overcome this empirical challenge through creative use of data. The primary focus of much of this scholarship has been education outcomes—and test scores specifically. Blau (1999)[1], for example, finds that $10,000 of income leads to around a ¼ standard deviation increase in test scores. Dahl and Lochner (2008)[2] find bigger results, with a $10,000 increase leading to an increase of about 60% of a standard deviation in test scores.

While convincing, this work is somewhat limited by the narrowness of the outcomes considered. Increased family income could improve children’s outcomes through at least two distinct channels. First, direct investments of new money in education (books, educational toys, tutoring) could improve long-run child outcomes. The developmental psychology literature has referred to this as the ‘resources’ channel (Yeung et al, 2002[3]), and this has been the primary focus of most economic analysis. But the lack of income in a family might lead to aggravation, stress, and more troubled relations among family members. These environmental conditions could affect children’s long-run wellbeing by impairing their emotional, physical, and academic development. This channel is called the ‘family process’ channel and has been explored far less in the economics literature.

Evidence from the Canadian child benefit system

In a recent working paper[4], we address the impact of increased transfers to poorer families on children’s and families’ outcomes. Our study brings two advantages. First, we study Canadian children over a time period in which transfers to families underwent substantial reform; reform that differed through time, across provinces, and across family types. This extent of policy variation is useful because it allows us to examine the impact of extra family income by comparing similar families who happen to live in different provinces or are studied in different years. The second advantage of our study is that we have available a large and detailed survey, the National Longitudinal Study of Children and Youth (NLSCY), which allows us to broaden our focus to include several measures indicative of an active ‘family process’ channel.

We have results in three spheres.

First, we find that an extra $1,000 of child benefits leads to an increase of about 0.07 of a standard deviation in the math scores and the Peabody Picture Vocabulary Test, a standard measure of language ability for young children ages four through six.

These findings are of the same magnitude as the Dahl and Lochner (2008) study mentioned earlier, which helps to corroborate their result.

Second, we examine the impact of child benefits on indicators of mental and emotional wellbeing using standardised psychometric scores available in the NLSCY. We find that more child benefit income leads to lower aggression in children and decreases in depression scores for mothers.

Finally, for physical health we find little evidence of improvements related to increased child benefits—although we do find a decrease in families reporting their children have been hungry due to lack of food.

We also break down our results by gender, finding stark differences across boys and girls.

Girls seem to show greater response on the mental health and behavioural scores while boys show greater response on test scores.

This certainly suggests that the channels through which benefit income helps these families may indeed be different for boys than for girls.

Finding that benefit income can improve the emotional and mental health of children is not only important for child health. Recent research by Currie and Stabile (2008) and Currie, Stabile, Manivong, and Roos (2008) shows that improvements in child mental health lead to long-term academic success, which is strongly correlated with improved earnings.

Implications for policy

The economic troubles of the past few months have generated a global whirl of policy activity as fiscal stimulus packages are being crafted, designed, and implemented around the world at fast speeds. In the US, President Obama included enhancements to family transfers in his election platform and it seems likely that improved transfers will be a part of the fiscal debates in Washington over the next month. It wouldn’t be surprising if similar measures were considered as part of stimulus packages elsewhere, as well. Our research suggests that well-designed income transfers can not only help families make their way back to employment, but also improve the educational, mental health, and behavioural outcomes of the next generation.

References

Currie, Janet and Mark Stabile (2008), “Mental Health in Childhood and Human Capital[5],” forthcoming in An Economic Perspective on the Problems of Disadvantaged Youth, Jonathan Gruber (ed.) (Chicago: University of Chicago for NBER).